Openmarkets’ failure to stop trader playing both sides of the market triggers massive fine

Openmarkets has been hit with a massive fine after letting a major client place thousands of potentially market manipulating wash trades, despite being fined over the same conduct years ago.

ASIC said Openmarkets had a “very poor” history of compliance failures.

Openmarkets has been hit with a massive follow-up $4.5m penalty after it continued to place orders for a client placing thousands of wash trades, commonly used in efforts to manipulate the share market.

It is understood one client of Openmarkets was responsible at times for up to 15 per cent of the daily trade in particular blue chip stocks, and was placing so-called “iceberg” trades into the market.

These involve orders being placed at the same time and the same price for a particular security, but with large differences in volume, causing other market participants – including trading algorithms — to misread market sentiment.

The process is understood to be colloquially referred to as “gaming the algos” (algorithms) and is illegal.

Openmarkets had been penalised in 2017 for the same issues relating to trading by the same client, but “had again failed to engage the anti-wash trade filter’’ which was “‘serious’ and ‘very reckless’’’ ASIC said on Thursday.

The corporate regulator’s Markets Disciplinary Panel (MDP) said it had hit Openmarkets with a $4.5m fine — the largest ever penalty of its kind to date — and the trading platform has also entered into an enforceable undertaking.

“This outcome sends a clear message to market participants that breaches of market integrity rules will result in substantial penalties that should not be seen as a cost of doing business,’’ ASIC said.

“The MDP would have imposed a significantly higher penalty, however reduced the total amount due to factors that included Openmarkets entering into an enforceable undertaking and not contesting the alleged contraventions.’’

ASIC said Openmarkets also failed to prevent unprofessional conduct by senior staff.

“This included a senior staff member warning a client in relation to … alerts that they triggered, instead of escalating the matter to compliance. The MDP considered this was ‘highly unprofessional and an aggravating factor’.’’

ASIC has banned Openmarkets’ former acting head of trading and designated trading representative (DTR), Virginia Owczarek, of Gisborne, Victoria, from providing any financial service for three years.

Openmarkets was hit with a $200,000 penalty in 2017 relating to 1858 trades executed in 2015, “for clients which involved no change in beneficial ownership (such trades being commonly referred to as ‘wash trades’),’’ the MDP ruling reads.

Licence conditions were imposed on Openmarkets at the time, however by 2020, ASIC says, it was again failing to ensure compliance with securities rules, and had “failed to engage the anti-wash trade filter in its … system’’.

One client — the same client responsible for the 2017 penalty — attempted 175 trades between January 2020 and March 2021, worth $13.9m.

ASIC says Openmarkets should have reasonably suspected the client was intending to manipulate the market because of their trading history and because “on 2011 occasions between January 1, 2020 and March 31, 2021 the client booked simultaneous bids and ask

orders in the same security at the same price point, in many cases as part of an unusual series of orders, including the amendment and cancellation of large volume orders’’.

“In relation to 1205 of the 1208 iceberg orders (and 2008 of the 2011 occasions where the client submitted a same price order), the client submitted at least one resting order on the opposite side of the iceberg order at priority.

“This created a significant asymmetry in both the order number and volume submitted by the

client.

“Further, those resting orders were often cancelled or amended so as to lose priority within a short interval of the iceberg order being filled or partially filled.

“The MDP was satisfied that Openmarkets had reasonable grounds to suspect that the … client transmitted an order or transaction to a trading platform of a market that was likely to have the effect of creating an artificial price for trading in securities on a market or creating a false or misleading appearance of active trading in those securities’’.

Also “a senior DTR of Openmarkets was aware that a client was triggering a significant number of concerning … alerts from May 2020, but did not escalate the matter. Indeed, on a number of occasions the DTR inputted ‘no further action’, closing out the relevant alert’’.

The MDP ruling said while Openmarkets had written policies, it did not have the processes or staff in place to be able to apply, them, and its conduct continued for 41 months.

“The MDP considered that the nature of the conduct and the extended length of time

over which the conduct occurred was an aggravating factor and that the character of

the conduct was serious,’’ the ruling says.

“The MDP considered Openmarkets’ internal controls were completely inadequate.

“Further, as mentioned above, the compliance history of Openmarkets was very poor.’’

In addition, a back-office system transition at Openmarkets inadvertently resulted in trust account deficiencies of up to approximately $20m on 35 consecutive business days from 18 August to 5 October 2021, ASIC said.

The enforceable undertaking requires Openmarkets to appoint an independent expert to assess, report on and identify any necessary remedial actions.

Openmarkets said in a statement it has “provisioned for this penalty and so the payment of the penalty will have no impact on Openmarkets’ day-to-day operations’’.

“Openmarkets today is a very different business than it was in the period when the above conduct occurred.

“Since these matters were identified, Openmarkets has significantly overhauled its business, under the leadership of a new executive team.

“Further, Openmarkets has uplifted its compliance controls and systems. Openmarkets also commissioned, of its own accord, an independent review of the design of its trade surveillance systems in 2021 and has hired new trade surveillance experts to work within its compliance team.’’

Openmarkets is owned by Sydney-based BMYG Financial Group.

Its financial report for the 2022 financial year shows it made a $1.5m loss on revenues of $14.6m, down from $15.6m the previous year.